What is Credit Counseling?

Key Takeaways
  • Credit counseling offers debt-relief through a debt management plan or DMP.
  • After enrolling in a DMP, you make a single payment to the credit counseling agency and they pay creditors based on your plan agreement.
  • Creditors will often lower your interest rate and waive fees as part of the DMP plan.
  • Leaving the plan before completion will negate any creditor concessions.

Been there, done that…AND that, about your debt on your cards. You made minimum payments for years, only to watch your balances grow.  You’ve tried the snowball and stacking methods to eliminate your credit card debt, without success. 

Whether it is too much temptation, the lack of discipline, or the overwhelming prospect of paying off tens of thousands of dollars worth of credit card debt, you realize that you cannot successfully do it alone. Here’s a look at what Credit Counseling is really all about and where you need to be to say ‘sign up’. 

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When looking for professional help to manage debt, credit counseling is often the first recommendation your credit card company will make. But, before making that call, there are some important things you need to know about how credit counseling works.

The Structure of Credit Counseling Companies

Credit counseling companies often use a non-profit business structure requiring them to offer financial counseling services at no charge to the consumer. But as you will discover later, this doesn’t mean that they are working for free.  You can get educational assistance and free advice on things like budgeting and credit management. 

Credit counselors begin with a debt consultation, including an evaluation of your debt, assets, income, and credit. After a review, the counselor will likely recommend debt elimination through a debt management plan. 

Separate from credit counseling services, the debt management plan (DMP), is a paid service, which requires you to repay 100% of your debt plus some interest over a period of no longer than 60 months. 

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You Must Qualify for a Debt Management Plan

Based on your income and debt load, you must be able to qualify for the new payment schedule, which may often be higher than your current minimum payments. You MUST be able to demonstrate a reliable, sufficient level of income to pay your current obligations plus the monthly program payment your credit counselor will forward to each of your creditors.

Not All Creditors Work with Credit Counseling Companies

Credit Card companies who choose to work with credit counselors may waive late fees and penalties or lower interest rates on the enrolled account. While most credit card companies work with most credit counseling agencies, each creditor may establish their own program guidelines for the reduction of interest, payment terms, and the conditions or reasons they may or may not abate late fees and penalties that have previously accrued.  

Terms and Concessions Will Differ Across Creditors

Credit card companies typically make waiver decisions based on pre-set parameters, which directly impact the willingness to adjust interest rates and waive fees. The parameters might include the amount owed, account history, and other factors.  Given there is no universal standard for interest reduction or repayment plan terms, you may not be able to qualify with every creditor you apply with and you may not be able to secure the program terms desired to meet your ability to repay the debt.

What Types of Debt Do Credit Counseling Agencies Accept?

Credit counselors work primarily with unsecured debts such as credit card debt and personal loans. They do not typically negotiate on your behalf for secured debt, such as a car or home loan. You choose which debts to enroll in the DMP. Any debt included requires you to close the account. 

Impact of Credit Counseling on Credit

Accounts enrolled in a debt management plan, administered through a credit counseling agency, are not part of the credit score calculation. However, creditors place a notation on each enrolled account indicating that you are in credit counseling. This notation most always discourages other creditors from extending credit, even if you would otherwise qualify for the loan. 

You Could Owe Taxes on Any Creditor Concessions

Companies who waive or forgive $600 or more in interest, late fees, or penalties could issue a 1099-C, which will make you liable for taxes on the forgiven amount. 

How Credit Counseling Companies Get Paid

The Consumer pays account and maintenance fees for the administration of the debt management plan.

The Creditor pays the credit counseling agency a “fair share contribution,” for debt payments made through the program. DMP’s are a primary source of revenue for credit counseling companies, which also means you may not receive an unbiased assessment of your options from your creditor.

The Cost of Default 

If you leave a debt management plan before completing the program, you become responsible for the entire debt balance. Creditors may also tack on all previously waived fees and interest onto the total amount owed and add back accrued interest at the prevailing rate prior to entering a credit counseling program.  Defaulting in a debt management plan will also subject you to renewed collection efforts and possibly litigation to collect any unpaid balances owed should you not be able to continue making payments.  These contingencies will reduce or eliminate any benefits from credit counseling should be unable to complete the program. 


Credit counseling is a good option for those who want to pay off 100% of debt balances and some interest with the help of a third party.  For those with good household income and lower debt balances, working with a credit counseling agency may help you get back on track.  A debt management plan allows you to make a single payment each month. The credit counselor then disperses payments across your creditors, simplifying debt repayment

It is, however, an all or nothing proposition. Failure to complete the program will reverse all the benefits for any account with an existing balance and may leave you in a worse situation than when you started. 

  • Is credit counseling a good debt-relief option?

    Credit counseling agencies offer debt relief through a debt management plan or DMP. When you choose a DMP, you repay creditors 100% of the debt balance and save money through lower interest rates and waived fees and penalties.

  • Does credit counseling hurt my credit?

    All forms of debt-relief have a negative impact on your credit. At the start of a DMP, you must close all enrolled accounts, which will cause your credit score to decline because your credit utilization increases, and your credit history could shrink.

  • How long does credit counseling last?

    A debt management program or DMP, administered by a credit counseling agency, requires you to repay enrolled debts within five years.

  • How long does credit counseling stay on my credit?

    Creditors put a notation on your credit file indicating that you are participating in a debt management plan or DMP. The notation remains on your file as long as you are in the program, which lasts a maximum of five years.